How to make your mutual fund pay?

As the capital markets regulator, SEBI rules that direct investors should not be asked to compensate distributors, we look at how the average Indian investor can fully leverage mutual funds.

As the capital markets regulator, Securities and Exchange Board of India (SEBI), rules that direct investors should not be asked to compensate distributors, we look at how the average Indian investor can fully leverage mutual funds.

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How does ‘direct’ plan save costs?
If you invest in mutual funds (MF) directly, without any distributor's help, it is obvious that you should not pay the distributor. So far, you ended up paying to the distributor community because the net asset value (NAV) at which you got to invest in was arrived at by deducting certain expenses, including commissions paid to distributors. SEBI feels that direct investors should, therefore, not be asked to compensate distributors. Last week, at its board meeting, SEBI took a decision that direct investors will get to invest at a different NAV.

What is different NAV?
We await SEBI’s circular which is believed to come out in a week’s time or perhaps, two. But going forward, all schemes will now have a separate plan called the ‘direct’ plan. This plan will have a separate NAV. Asset management companies (AMCs) pay two types of commissions to distributors. While the upfront fees goes out of the AMC’s pocket, the trail fees is paid out of the total expense ratio (TER) fees that fund houses collect from you. MFs charge TER for various costs it incurs including agent fees. With a separate plan and separate NAV, investors who avoid the distributor route will no longer pay agent fees.